With last month’s post about the new Trump Accounts, we thought it’d be helpful to review a couple of other savings vehicles for children in your family.
For families thinking ahead to college costs, two savings vehicles come up most often: the 529 plan and the UTMA/UGMA custodial account. Both can help build funds for a child's future, but they work very differently — and the right choice depends on your goals, flexibility needs, and tax situation.
529 Plans: Built for Education
A 529 plan is a tax-advantaged account specifically designed for education expenses. Contributions grow tax-deferred, and withdrawals are federally tax-free when used for qualified expenses — tuition, room and board, books, as well as trade schools, and even K-12 tuition up to certain limits. Many states also offer a state income tax deduction or credit for contributions.
Pros:
- Tax-free growth and withdrawals for qualified education expenses
- High contribution limits (often $300,000+ per beneficiary, depending on the state)
- The account owner (typically a parent) retains control indefinitely — the child never gains automatic access
- Funds can be redirected to another family member if the original beneficiary doesn't need them, all or in-part
- Since 2024, unused 529 funds can be rolled into a Roth IRA for the beneficiary under certain conditions, reducing the "what if they don't go to college" concern
- Favorable financial aid treatment — 529 assets owned by a parent are counted at a lower rate than a child's own assets. 529 assets owned by a grandparent are not currently counted against financial aid on the FAFSA. The impact on aid may be different for schools that use the CSS Profile.
Cons:
- Limited flexibility in the use of funds beyond education
- Non-qualified withdrawals face income tax plus a 10% penalty on earnings
- Investment options are limited to what the plan offers
UTMA/UGMA: Flexible, but Fewer Guardrails
UTMA (Uniform Transfers to Minors Act) and UGMA (Uniform Gifts to Minors Act) accounts are custodial accounts that hold assets for a child's benefit until they reach the age of majority (18 or 21, depending on the state). They aren't limited to education — the funds can be used for anything that benefits the child.
Pros:
- No restrictions on how the money is spent, as long as it’s for the child’s benefit
- Broader investment options, including individual stocks and other assets
- Simple to open and fund
Cons:
- The child gains full legal control of the account at the age of majority, with no say from the parent — regardless of how the money is used
- Investment earnings are subject to the "kiddie tax," which can tax a portion of investment income at the parent's rate once it exceeds certain thresholds
- Contributions are irrevocable gifts to the child; they cannot be redirected to a sibling or reclaimed
- Custodial assets are counted more heavily against the student in financial aid calculations, since they belong to the child
Which Makes More Sense?
For most families, whose primary goal is funding education, a 529 plan tends to be the stronger choice. The tax advantages, higher contribution limits, continued parental control, and improved flexibility (thanks to the Roth IRA rollover option) can meet many of a family’s objectives.
An UTMA/UGMA can still make sense for families who want to gift assets for broader purposes beyond education, or who have already maximized 529 contributions and want to accumulate additional savings — understanding that control ultimately passes to the child.
As with any savings strategy, the right approach depends on your family's full financial picture. If you'd like help thinking through which option — or combination — fits your goals, we're happy to talk it through.
This article is for general informational purposes and does not constitute individualized financial, tax, or legal advice. Please consult your advisor regarding your specific situation.